Market Opinion Equities
Europe And Japan
We still like the equity markets of Europe and Japan. The uptrends of the DAX, FTSE and Nikkei are still very much in place, and we therefore expect to see a continuation of recent gains. While the FTSE has broken through the key 5,400 level, the DAX is trying to push through the important 5,000 barrier. The Nikkei is simply flying.
As for the DAX, there are political concerns at the moment surrounding the outcome of the German elections. The likelihood of a grand coalition government would potentially hinder any progress on much-needed structural reform. Furthermore, the recovery in the German economy is still somewhat fragile, as highlighted by the most recent dip in the IFO number, after the encouraging reading in July. Nevertheless there are some good things happening, which although very gradual, should be welcome to the long-term investor. Aside from Mr Schroeder’s cuts in pensions, healthcare and unemployment benefits, workers of Porsche and Linde have recently agreed to longer and more flexible working hours, with less overtime payments.
In the short term, the DAX is benefiting from a low interest rate environment in euroland, a weaker euro so far this year and strong regional money supply growth – August M1 rose by 11.1% y-o-y in euroland. Of course, German economic growth is still rather anaemic, and is likely to register less than 1.0% in 2005. Longer-term, much will depend on the effect of oil prices on the global economy, as well as the potential recovery in domestic demand within Germany itself. For now, though, the DAX is looking good.
Well, you know our view of the Nikkei, and it is really playing out. Following the Koizumi election victory, there is real potential for economic and political reform in Japan. Indeed, the privatisation of the postal service is now very much back on the agenda. As for the economy, real GDP growth in Q205 has been revised up to 3.3% y-o-y, from 1.1% previously. Although export growth has dropped, due to a fall in global demand, the Japanese consumer is alive and kicking. In fact, consumption, which rose by 1.75% in Q205, continues to grow, and encouragingly is being fuelled by higher incomes.
If the economy can maintain current momentum, and firms continue to restructure, the Nikkei can rise much further. We are still going for a medium-term rally towards the 15,000 area.
The problem is that the world and his proverbial wife are now long Japan, with investor optimism on the country at a five-year high. That said, we believe any correction will be relatively short-lived and should not deter the long-term investor.
Key risks to watch out for are Koizumi moving a little too fast on his plans to address the budget deficit, and the Bank of Japan tightening monetary policy too early. Both could potentially derail the recovery.
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